Yen Shorts Cleared Out, But History Favouring Further Yen Strength

The USD/JPY has seen a significant shift in speculative positioning over the past couple of weeks, with yen shorts being cleared out at a near-historic pace. According to the latest data from the CFTC, net speculative positioning swung from around 92,000 contracts short to almost 11,000 contracts long in the week to September 8. This massive unwind is only rivaled by one larger reversal in short positioning since 1986.

While this shift may indicate that the vulnerabilities created by stretched speculative short positioning have been largely removed, history suggests that abrupt reversals in speculative positioning have often been followed by further yen strength. In fact, looking at previous occasions where net speculative yen positioning improved by more than 40,000 contracts in a week while starting net short, USD/JPY was lower one week later in 60% of instances.

The technical picture for the pair continues to favour a bearish bias, with a string of lower highs and lower lows remaining intact. The medium and long-term moving averages are flattening out or beginning to roll over, and the price remains beneath all three. With the Fed and BOJ decisions on Wednesday and Friday respectively being key risks for USD/JPY traders to navigate this week, the preference remains to sell into strength and downside breaks.